Question

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information:

Sales price per abalone	=	$43.10
Variable costs per abalone	=	$10.50
Fixed costs per year	=	$438,000
Depreciation per year	=	$131,000
Tax rate	=	21%

The discount rate for the company is 13 percent, the initial investment in equipment is $917,000, and the project’s economic life is 7 years. Assume the equipment is depreciated on a straight-line basis over the project’s life and has no salvage value.

b.	What is the financial break-even level for the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Financial breakeven point = 19154.51 units

Base for the solution:

To calculate financial break even, initial investment is first expressed ad the equivalent annual cost (EAC), That is EAC is equivalent to the initial investment divided by the 7-year annuity factor discounted at 13%

EAC=initial investment/PVIFA 13%,7

PVIFA= (1 - (1 + r)^-n) / r

r=13%

n=7

therefore PVIFA= (1-(1+0.13)^-7)/0.13

                          = 4.4226

EAC=917000/4.4226

=207334.10

Financial breakeven point=[EAC+FC(1-tC)-D(tr)]/[(P-VC)(1-tC)

where FC= fixed costs

tr= tax rate

D=depreciation

P=sales price per abalone

VC=variable cost per abalone

Therefore, financial breakeven point= {207334.10+438000(1-0.35)-

131000(0.35)]/[(43.10-10.50)(1-0.35)]

= [207334.10+284700-85150]/(32.6)(0.65)

=405884.10/21.19

=19154.51 units